“Estonian Mafia” looking for the next generation of entrepreneurs

Estonian VCs are excited for future, worried about demographics.

TALLINN, ESTONIA—While Estonia’s prowess in cyberconflict and cyberdefense has grown in recent years, so too has its startup scene. After all, Skype was created in Estonia in 2003 and was acquired by Microsoft for $8.5 billion last year.

AngelList, a site that aims to link startups with venture capital, currently has 52 Estonian entries, which on a per capita basis, puts it as the number two country after the United States—not bad for a country with just 1.3 million people.

Among the speakers at Latitude 59 (full disclosure: I was a speaker, and my plane ticket and hotel were paid for by the organizers) were members of the Estonian old guard, including Allan Martinson, a well-known Estonia venture capitalist who during the emergent post-Soviet period in the 1990s was the founding CEO of the Baltic News Service and later the CEO of MicroLink, one of Estonia’s largest IT companies.

“I’ve been trying to analyze it,” Martinson said, attempting to understand the huge number of Estonian startups in recent years.

“There is no single reason. Perhaps when it really started about two to three years ago, it had something to do with the economic crisis, which influenced many people to leave their current jobs.”

He added that while it’s hard to prove directly, he speculated that many of the dozens of Estonian startups are “acts of desperation” to make money.

“Because if you're a guy in Estonia and if you're technically educated, you want to become rich. The only way to become rich in this country if you have a technical background is to launch your own company. You probably couldn’t become rich by working for somebody. It's difficult to get $150,000 salaries in Estonia, which is an exception as compared to Silicon Valley. Here, you can’t become rich as a salaryman, and you can’t become rich by just focusing on the Estonian market.”

Narrow firms, growing success

Martinson pointed to a few recent success cases, or companies that many people outside the tech industry probably haven’t heard of, as they focus on particular niche industry areas. If you prefer the startup jargon, they're B2B outfits.

These are companies like ZeroTurnaround, a Java development tools company, which has gone from zero to almost $10 million of revenue in three years; GrabCAD, an online community and social network for mechanical engineers; or Kinotehnik, a photographic equipment company that has drawn a fair amount of attention in filmmaking and photography.

“There are probably 50 to 70 startups which have emerged within the last two or three years,” Martinson added. “Around five to ten of them have grown to over $1 million in revenue, some even reaching $10 million. So most likely we will see one or two companies reaching $100 million size in about three to four years time, which is substantial. And if we reach $1 billion, we’ll be extremely lucky.”

Of course, he said that it took Skype six years to reach the billion-dollar threshold. But beyond entrepreneurship, there may be a much more fundamental obstacle to continuing with Estonia’s tech success.

“One very Estonian issue here is that in the early 1990s we had a big demographic slump,” Martinson said. “The birth rate went down. We used to have 20,000 births a year in 1989, which then dropped to 12,000. That means that now those people are becoming 20-22 years old, and we have the least number of really young people. That means that any company here in Estonia, especially a high-tech [company] that employs young people—they will experience much less choice in labor market and have access to fewer people who will become entrepreneurs.”